Mark Scheme (Results)
Summer 2014
Pearson Edexcel GCE
in Economics (6EC03) Paper 01
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Summer 2014
Publications Code UA038591
All the material in this publication is copyright
© Pearson Education Ltd 2014
2
General Marking Guidance
•
All candidates must receive the same treatment.
Examiners must mark the first candidate in exactly the
same way as they mark the last.
•
Mark schemes should be applied positively. Candidates
must be rewarded for what they have shown they can do
rather than penalised for omissions.
•
Examiners should mark according to the mark scheme not
according to their perception of where the grade
boundaries may lie.
•
There is no ceiling on achievement. All marks on the mark
scheme should be used appropriately.
•
All the marks on the mark scheme are designed to be
awarded. Examiners should always award full marks if
deserved, i.e. if the answer matches the mark scheme.
Examiners should also be prepared to award zero marks if
the candidate’s response is not worthy of credit according
to the mark scheme.
•
Where some judgement is required, mark schemes will
provide the principles by which marks will be awarded and
exemplification may be limited.
•
When examiners are in doubt regarding the application of
the mark scheme to a candidate’s response, the team
leader must be consulted.
•
Crossed out work should be marked UNLESS the candidate
has replaced it with an alternative response.
If the key is incorrect then the maximum explanation mark is 2, i.e.
0+2=2
Knockout marks (or rejection marks):
Candidates can be awarded up to 2 marks, 1 per point, for knocking out
incorrect answers. This only counts if they have given a valid economic
reason to go with their answer, where they have added value to the
question.
E.g. for question 1, explaining it’s not horizontal integration because that is
where you merge/takeover a firm at the same stage in the production
process/industry.
Candidates can also receive knockout marks without explicitly selecting a
letter, if it’s a clear reference is made to a key.
3
Question Answer
Number
1
Correct option B (1 mark)
Mark
(4)
Vertical – at a different stage of the same industry or
process of production or same final product (1)
Backwards - it is previous/earlier/towards raw
materials/away from consumer (1)
Reasons or benefits of merger (1+1) e.g. rationalisation
Application to the dairy industry (1) e.g. Proper Welsh is
a primary industry. Only award the application marks if
relevant to backward integration.
Knock out examples
It cannot be D because conglomerate integration
involves merging with a firm in a different industry
It cannot be C because forward integration is towards
the consumer
4
Question Answer
Number
2
Correct option E (1 mark)
Mark
(4)
Definition of a price taker e.g. has to sell at the market
price (1)
Horizontal or perfectly elastic demand curve (1) – could
also be awarded from their diagram (not both)
Explanation of perfect competition: one characteristic,
e.g. no barriers to entry or exit, many firms,
homogenous product (1);
Diagram showing horizontal AR=MR
(1 – if not previously awarded); link to market
equilibrium in a separate market or industry diagram
(1)
Application to cherries – they seem very similar (1)
Examples of knock out:
It is not A as we assume they are a profit maximiser
operating where MC=MR
It is not C as MC=AC is the productive efficiency point
and this will only happen in the LR
5
Question Answer
number
3
Correct option B (1mark)
Mark
(4)
Definition profit satisficing (making enough profit to keep
shareholders happy/sufficient/just enough/target/fixed
amount) (1)
Reasoning, e.g. they may have other objectives (1)
It may mean long run profit maximisation (1)
Reason why this occurs e.g. divorce of ownership from
control, principal agent problem (1)
Diagram to illustrate minimum profit as range of output
levels (1)
Application – people may be shareholders for other
reasons than profit e.g. winning matches, attendance at
matches, brand development (1 + 1)
Example of knock out:
It’s not C as profit maximising is where MC=MR
It’s not A as low dividends are likely to make share
prices fall (or other logical reasons why share prices
change)
6
Question Answer
Number
4
Correct Option D (1 mark)
Mark
(4)
Output
per
week
Total
revenue
(£millions)
Average
revenue
(£millions)
Total cost
(£millions)
Average
cost
(£millions)
Marginal
cost
(£millions)
0
0
-
10
-
-
1
40
40
25
25
15
2
60
30
34
17
9
3
78
26
52
17.3
18
4
96
24
96
24
44
5
105
21
150
30
54
Definition sales maximisation AC=AR or TC=TR; or selling as
much as you can without making a loss (1)
Identification that at sales maximisation there are normal
profits or no supernormal profits/loss (1)
Filling in columns with correct AR, TC, AC, TR-TC or total
profit (1 mark for each correct column up to 4 units is
sufficient): (1 + 1+ 1)
Diagram showing AC=AR (1)
Output is at £96 million TR/TC or £24 million AR/AC (1)
7
Question
Number
5
Answer
Mark
Correct Option A (1 mark)
(4)
Definition of oligopoly e.g. a few firms dominate the
market (1)
Supermarkets are interdependent (1)
Other firms will follow if prices are cut (1)
Firms will not follow if prices rise or other asymmetric
reaction comments (1)
Diagram showing a kinked demand curve with
annotation or explanation of inelastic section for
downward moving prices or elastic section for upward
moving prices (1 +1) – Note kinked demand curve is not
required
Pay off matrix correctly showing that the firm will not
change prices (1 + 1)
Application – bread is regularly purchased and therefore
easy to spot price changes (1) or often a loss leader (1)
Example of a knock out:
It’s not C as if it is tacit collusion it has not been
controlled by the regulator/competition authorities
It’s not D because supermarkets use non price
competition such as loyalty cards and customer service
schemes
8
Question Answer
Number
6
Correction Option C (1Mark)
Definition of contestability e.g. no/low barriers to entry
or exit or no sunk costs (1). May be implicit.
Reasons why barriers to entry might rise (or reduced exit
options) (1 + 1 + 1) e.g. economies of scale, power to
advertise, giving firms monopoly power to limit
competition or raise prices. The reasons must be linked
to contestability not competitiveness.
Role of the regulator, e.g. protect consumer
interest/welfare (1)
Identification that it is horizontal integration (1)
Mark
(4)
Example of knock out:
It’s not D because the market size could get bigger or
smaller
It’s not B because consumer surplus is likely to fall if
prices rise
9
Question
Number
7
Answer
Mark
Correction Option B
Definition of allocative efficiency, e.g. the price is equal
to the marginal cost (AR=MC or P=MC) (1)
Explanation of monopoly – single firm dominates or
25%+ market share (1)
Explanation that the price has been set at a point that
maximises (consumer/producer) welfare (1);
Monopoly may do this as marginal cost pricing has been
imposed by the government (1)
Annotation of diagram showing consumer/producer
welfare(1)
(4)
Example of knock outs (can also come from annotating
the diagram)
It’s not C because M is not at the lowest point of AC
It’s not D because this is revenue maximisation (or the
area KLMN represents SNP for a revenue maximising
firm)
It’s not D as shown by a correctly annotated profit
maximising area on their diagram (connecting AR and
AC at output T – this will involve a new horizontal line
meeting the AC curve)
10
Question
Number
8
Answer
Mark
Correction Option A
Meaning of PFI: major
infrastructure/buildings/project/large scale contracts are
issued by governments to private firms (1)
It is then leased or rented to the public sector (1)
over 25-30 years (1)
Benefits to the government e.g. – it does not have to
borrow this year (off the balance sheet), can spend on
current demands, useful in times of fiscal austerity,
makes efficient use of specialists, reduces risk for
government, leads to more immediate public services,
creates competition at point of tendering, “the
government’s credit card”(1 + 1+ 1)
(4)
Costs to the government e.g. - leading to higher overall
costs in the long run (1) – these may be incorporated
within knock out marks
Application to hospitals, e.g. more specialist hospitals or
more up to date technology, better quality service(1)
Examples of knock outs:
It’s not C as PFI will decrease x-inefficiency as there is
competition during the tendering process
It’s not D as to exit the contract there will be penalty
costs
It’s not B as the government achieve a lower rate due to
carrying less risk
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Question 9 The chewing gum market
Question Answer
Number
9a
Theory (2): Oligopoly (1) where a few firms dominate
the market, or similar explanation (1)
OR Monopoly (1) where one firm dominates the
market/one firm with more than 25% market share
(legal definition)
Mark
(4)
Application (2):
2 firm concentration ratio of 61% (2)
3 firm CR of 75% (2)
4 firm CR 81% (2)
5 firm CR 83% (2)
Other application (1 + 1) e.g. – Wrigley has 35%
market share or Cadbury’s has 26%(1) which is
greater than the 25% legal minimum (1) other
evidence of oligopoly behaviour e.g. strong brand
names, collusive behaviour, barriers to entry, high
sunk cost, high cost of research (1)
9b
Reserve one application mark for use of Figure 1
KAA 4 (may or may not include a definition mark)
Definition (1): A patent is a legal protection of a
design idea or process (1) or, a kind of copyright (1)
(8)
Benefits of patents (2+2 or 3 +1) might include:
For firms:
• Helps to develop a competitive advantage via a
unique feature
• Provides a source of monopoly power
• Barriers to entry
• Give firms short/medium term abnormal profits
• Enables firms to develop into new market
Benefits to economy as a whole:
• Encourage Research and Development
• Existing firms can take risks with new idea
• new ideas from universities will have practical
uses
• Innovation is encouraged e.g. dynamic
efficiency
• Macro benefits, e.g. multiplier effects
• Investment in research in turn in the long run
may benefit society as a whole e.g. cancer
• External benefits e.g. less passive smoking
Benefits to other stakeholders:
• Government benefits e.g. reduced costs of
cleaning pavements
• Consumer benefits e.g. more choice &
improved quality
CAP 3 KAA if only one benefit of patents
12
Evaluation (2+2 or 3+1 or 4+0):
• Patents allow supernormal profits to be made
(question of fairness),
• Patents stifle competition or innovation by
others;
• alternatives to patents might be considered,
e.g. subsidies to university research
• crowding out of other innovation
• leading to higher prices or reduced choice
• disadvantages of monopoly
• may cause x-inefficiency
• Other problems of patents e.g. – cost to
achieve, only held for a limited time, not fair to
firms who cannot gain them, enforcement
issues
13
Question
Number
9b
Answer
Mark
KAA 4 (may or may not include a definition mark)
Definition (1): A patent is a legal protection of a design
idea or process (1) or, a kind of copyright (1)
(8)
Benefits of patents (2+2 or 3 +1) might include:
For firms:
• Helps to develop a competitive advantage via a
unique feature
• Provides a source of monopoly power
• Barriers to entry
• Give firms short/medium term abnormal profits
• Enables firms to develop into new market
Benefits to economy as a whole:
• Encourage Research and Development
• Existing firms can take risks with new idea
• New ideas from universities will have practical
uses
• Innovation is encouraged e.g. dynamic efficiency
• Macro benefits, e.g. multiplier effects
• Investment in research in turn in the long run
may benefit society as a whole e.g. cancer
• External benefits e.g. less passive smoking
Benefits to other stakeholders:
• Government benefits e.g. reduced costs of
cleaning pavements
• Consumer benefits e.g. more choice & improved
quality
CAP 3 KAA if only one benefit of patents
Evaluation (2+2 or 3+1 or 4+0):
• Patents allow supernormal profits to be made
(question of fairness),
• Patents stifle competition or innovation by
others;
• Alternatives to patents might be considered, e.g.
subsidies to university research
• Crowding out of other innovation
• Leading to higher prices or reduced choice
• Disadvantages of monopoly
• May cause x-inefficiency
• Other problems of patents e.g. – cost to achieve,
only held for a limited time, not fair to firms who
cannot gain them, enforcement issues
14
Question Answer
Number
9c
Reserve 2 marks for diagram:
Shift showing increasing costs (e.g. legal costs) or
falling/insufficient demand (1) and loss area/smaller
profit connected with MC=MR (1)
Mark
Reasons might include (2+2 or 3+1):
• Nicotine gum manufacturers are acting in a
threatening way (game theory might be used to
develop this argument)
• Too many competitors for the firm to make
supernormal profits
• Huge costs of operating in US relative to other
countries, and other set up costs, e.g. £500 000
annual cost base in US
• It has reached shut down point or not making
enough profit
• It does not expect demand to grow sufficiently
in the future
• Demand was not as high as expected. ‘Gum
market is shrinking’ in Extract 2
• Challenge to patent
• Nicotine firms might be cross-subsidising in the
US, or similar comments on the confectionery
market being directly affected by the nicotine
market problems
• other things are not equal
• Lack of commercial opportunities in US
• Better opportunities elsewhere
Evaluation 6 marks: (3x2 marks or 2x3 marks). Points
might include:
• Not enough information to say as insufficient
data provided
• Other markets might be more profitable, e.g.
Ireland/EU
• New products find the US more difficult than
other countries to break into – higher marketing
barriers
• Use of game theory might show how new
entrants are deterred
• Cost and revenue factors work together to
magnify the impact, or other weighing together
of the factors
• Depends on the degree to which they can cross
subsidise losses in the US, the amount of
retained profits within Revolymer
• In the LR the situation may improve e.g. –
working with commercialisation partners as in
Canada (extract 2 line 10)
• Comment on the £360 000 cost of closing down.
It might have been better to stay in the US.
• Prioritisation of the reasons with justification
15
Question Answer
Number
9d
Award up to 4 strategies (4x2 marks), or (3+3+2) or
(2x4 marks)
Strategies might include:
• Pricing policies (may count as more than one
strategy): predatory, limit pricing, sales max
• Non-pricing strategies, e.g. heavy marketing
(may count as more than one strategy)
• Cross subsidisation
• Existing firms might cut own costs
• Collusion
• New ideas might be developed to create barriers
to entry
• Other barriers to entry discussion
• Merger & acquisition activity is likely e.g. new
entrants being bought up
• Challenge legal patents that have been awarded
Mark
16
Award appropriate use of game theory to develop a
point
KAA CAP 6/8 if no reference to chewing gum
manufacturers
Evaluation 8 marks (4x2 marks), or (3+3+2 marks) or
(2x4 marks):
• there might not be a reaction – very small firm,
already failing in US, niche market
• Other magnitude points, e.g. size of profits of
existing firms might mean that new entrants
cannot compete in marketing
• US market is unlike Europe market. Might be
more room for growth in Europe or elsewhere.
• Depends on whether we are in recession or
growth (is the product a luxury?)
• Discussion involving game theory can earn
evaluation marks, e.g. the behaviour depends
on the size of the payoffs
• Size of fines, and magnitude of other legal
powers
• Critical judgement of strategies set out under
KAA
• Prioritisation with justification
16
Question 10 Camera retailing
Question
Number
10a
Answer
Mark
Theory (2) –
Price (AR) is less than or equal to AVC OR Price (AR) is
less than or equal to AC (long run) – (1) OR TR is less
than or equal to TVC (1)
(4)
Explanation of the above. For example the firm is:
• making less than normal profit (1)
• making a loss which exceeds the VC (1) or
making a loss (1)
• not making a contribution (1)
• able to make a smaller loss if it discontinued
production (1)
• not covering its day to day costs/running
costs/working capital (1) i.e. an implicit
understanding of variable costs, which might be
achieved using application
A diagram showing price below AVC (1) with loss area
shown (1) or other explanation using a valid diagram.
Note that the diagram marks are part of the theory.
Application (2): Jessops was making a loss of £12
million (1) despite revenues of £304.6 million (1)
Since £12million is greater than the fixed costs (£8
million) so the firm is losing £4 million on variable
costs alone (1 + 1)
Example of variable costs: Jessops is not even covering
the costs of its cameras (1)
Example of fixed costs: Jessops is not covering rent (1)
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Question Answer
Number
10b
KAA 4 marks. Reserve 2 marks for diagram.
Mark
(8)
2 marks
For answers which discuss two difference revenue or
costs changes allow up to 4 marks. The answers must
be developed in different ways.
Diagram 2 marks.:
1 mark for shift (AR and MR shift, or AC shift (Costs
had risen (n.b. fixed costs must be related to data, and
no shift in MC)), 1 mark for loss area correctly linked
to MC=MR, and cost and revenue curves.
Reasons for loss (2 marks: 1+1 or 2+0) might include:
• Rising costs, with application
• Falling demand for cameras as a whole, with
application
• Increased competition for cameras meaning
smaller market power for each firm
• Consumers buying on the Internet
• Cameras in mobile phones
Evaluation 4 marks: (2+2 or 3+1 or 4+0)
• both demand and cost shifts can be shown to
magnify the impact
• Jones might be over-optimistic about end of
recession – losses may continue
• Jones is going to cut costs and increase demand
– profits will occur in future, but is temporarily
suffering losses
• Depends on ability of Jones to reduce future
losses
• Difficult to know – need more information about
causes of loss, e.g. how other firms have got on,
e.g. London Camera Exchange
• Camera phones are not a good substitute for all
buyers
• A £12million loss is very small in comparison to a
£304.6 million revenue
• It is a combined effect, compounded by another
factor
18
Question Answer
Number
10c
KAA 6 marks Allow up to (2x 3 marks) or (3x2 marks)
or Diagram (2) plus (2+2) or (3+1)
Mark
(12)
Answer may relate to price discrimination within
Jessops or between firms within any retailing market.
Allow 1 mark for clear explanation of price
discrimination (selling the same product at different
prices) (1)
Diagram marks (up to 2 marks)
- Inelastic AR or D linked to high price and/or
elastic linked to low price (1) (can be shown
through gradient of AR or D)
- Profit maximisation output and prices
extrapolated from whole firm diagram (1)
Reasons why price discrimination is possible:
Discussion of fulfilment of conditions for price
discrimination:
• Different price elasticity of demand, e.g. higher
PED online as more competition
• Monopoly power. Consideration of the branding
within the market, and the ability to retain
customers even when prices are raised. The
appeal of Jones himself might be considered as a
marketing tool.
• Separation of the market, e.g. people want to try
the product and receive advice in a shop, and
online there is a time delay before the goods are
received
• Low costs of preventing arbitrage, or similar. For
people shopping in store they may or may not be
prepared to go home and buy the product online.
Also can consider the risks or other costs of
buying on the internet.
Award application: as part of these conditions (up to a
maximum of 3 marks for each condition overall), e.g.
- Jessops sells accessories at higher prices in the
high street stores but the cameras are very
similar prices.
- Online prices are lower so people are transferring
to the online market.
- High street stores are closing for this reason
- Jones’s comments on trying the cameras in the
shop, the Apple-ish model, etc.
- Jones does not intend to price discriminate on the
major lines, but instead have very similar prices
to online. He plans to make the money on
accessories
19
Evaluation: 6 (2x3 marks or 3x2 marks)
• Discussion of whether price discrimination is in fact
possible as a strategy, e.g. in the long term
arbitrage will become easy
• It’s product discrimination not price discrimination
because costs in each market are different
• It’s product discrimination not price discrimination
because ‘Try before you buy’ and other advice in the
shop means that the product in the shop is not the
same as the one online (or similar application
points)
• Changes in the economic cycle will affect PED, and
other determinants of PED
• Jones is willing to stake £4million that discrimination
is possible
• Depends on the season, e.g. Christmas, and the PED
• Depends on other factors, such as ability to park,
availability of other retail outlets nearby, as to the
willingness of face-to-face shoppers to spend.
• Depends on actions of competitors e.g. click and
collect
• Other criticisms of price discrimination, e.g. it can be
illegal in some cases, and might be investigated by
the competition authorities
20
Question Answer
Number
10d
Award up to 4 strategies (4x2 marks), or (3+3+2
marks) or (2x4 marks)
Mark
(16)
Any comments regarding price discrimination are
NOT permitted
Strategies MUST be linked to profit. These might
include:
• Pricing policies (may count as more than one
strategy): predatory, limit pricing, cost-plus,
BOGOF if linked to profit
• Non-pricing strategies (may count as more than
one strategy) e.g. heavy marketing, loyalty
cards, good sales information, after sales service,
friendly, photo albums, posters whilst you wait
• Existing firms might cut own costs
• New ideas might be developed to create barriers
to entry
• Other barriers to entry discussion
• M&A activity is likely for new entrants being
bought up
• BOGOF (allowed if not used as a pricing strategy)
Award appropriate use of game theory to develop a
point
KAA CAP 6/8 if no reference to high street retailers
Evaluation 8 marks (4x2 marks), or (3+3+2 marks) or
(2x4 marks):
• it might not be possible to make profits – odds
are stacked against high street stores as their
costs are higher
• Magnitude issues, e.g. size of cuts in number of
stores by Jones is a significant shift in fixed costs
• Depends on whether we are in recession or
growth (camera is luxury, large part of income,
YED issues etc)
• Discussion involving game theory can earn
evaluation marks, e.g. the behaviour depends on
the size of the payoffs
• Depends on the actions of other firms (game
theory might be used)
• Some practices are illegal e.g. predatory pricing
• Cost of policies, e.g. advertising
• The high street retailer can adapt to also become
an online retailer
• Critical judgement of strategies set out under
KAA
• Prioritisation with justification
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